How a decumulation strategy could turn your retirement savings into a sustainable income

If you’ve ever climbed a mountain or watched in admiration as others do so, you’ll know that reaching the summit is only the halfway point.

Planning a safe return to base camp is just as important as navigating the ascent. Indeed, more have died descending Mount Everest than going up.

Similarly, while accumulating a healthy pension pot and other savings is a great start, unfortunately, it’s only half the battle when it comes to building a sustainable retirement income.

As you approach retirement, you also need to think about “decumulation” – how you’ll spend your hard-earned savings.

Read on to find out more about the different decumulation options available and discover three helpful tips for turning your retirement savings into a sustainable income.

Without careful planning, you could spend too much or too little

Spend too much too quickly, and you could face the risk of running out of funds later in life. The Managing Lifetime Wealth Report, sponsored by Aegon, has revealed that running out of money too soon tops the list of retirement concerns.

Alternatively, being too cautious could lead you to spend too slowly and you could miss out on all the wonderful experiences you hoped to have during your retirement. While you may want to preserve some of your wealth as a legacy for your loved ones, it’s also important to enjoy your desired lifestyle in retirement.

Despite these potential challenges of planning retirement spending, figures published by the Actuarial Post suggest that more retirees are shunning decumulation advice. According to the research, 41% of people purchased decumulation products without seeking professional advice in 2022, compared to 34% of non-advised sales in 2018.

Yet, carefully planning how to spend your accumulated wealth in retirement is crucial if you want to:

• Enjoy your desired lifestyle for as long as your retirement lasts
• Cover the cost of potential medical and later-life care
• Leave a financial legacy for your loved ones.

3 tips for planning an effective pension decumulation strategy

1. Assess your retirement income needs

To gain an accurate assessment of your retirement income needs, it’s essential that you account for your unique circumstances and goals.

Working out what’s most important to you is a crucial first step in decumulation planning.

For example, your top priority might be to retire early and spend more time with your children and grandchildren while you’re relatively young and fit. In this case, your retirement savings may need to stretch further than if you continued working later in life.

Alternatively, you might be dreaming of a luxurious retirement lifestyle filled with exotic holidays, fine dining, and beautiful clothes. As a result, you’re likely to need a higher annual retirement income than if you had more modest plans.

If you’ve spent a lifetime working and saving, retirement is your chance to fulfil long-held ambitions and build the life you’ve always dreamed of. So, identifying your retirement goals and carefully calculating how much income you’ll need to support this lifestyle, is the cornerstone of an effective decumulation strategy.

2. Consider how your spending might change throughout retirement

It’s important to note that your spending may not remain the same throughout your retirement.

“The retirement spending smile” describes a typical pattern of spending. Retirees tend to spend more in the early years after leaving work as they rush excitedly to fulfil dreams they’ve held for many years, such as extravagant travel and buying a second home.

As retirement becomes the norm and people become a little less able to go on expensive holidays or achieve their goals, their spending often dips. It then increases again in the later stages of retirement, when medical and later-life care costs may arise.

Of course, your spending habits might not follow this pattern. But it’s likely that there will be some variance in your income needs as you move through retirement.

So, when transitioning from saving to spending, it’s important to consider how your income needs may fluctuate and plan for any one-off big expenditures. For example, you might want to seek financial advice about how to withdraw a lump sum from your pension tax-efficiently, or how to dispose of an asset without incurring a large Capital Gains Tax bill.

Read more: 5 important points to consider before accessing your pension

3. Decide how to draw your pension

If you have a defined contribution (DC) pension – the most common type of workplace pension – it will be up to you to decide how much of your savings to withdraw and when.

Three of the most popular options for drawing a DC pension are:

• Buying an annuity – This allows you to exchange part or all of your pension fund for a regular income that lasts for a fixed period (usually until the end of your life).
• Choosing flexi-access drawdown – This allows you to draw money from your pension as and when you need it during retirement. You can usually take up to 25% of your pension pot as a tax-free lump sum, provided that this does not exceed £268,275 – this is known as the Lump Sum Allowance.
• Taking a lump sum – You could choose to take a larger portion, or all, of your pension savings when you retire.

This choice could be overwhelming. Converting a lifetime of pension savings into a sustainable income involves careful consideration of several factors, such as your life expectancy, market performance and inflation.

It’s also important to consider the tax implications of how you make withdrawals.

It may be tempting to cash in your entire fund as soon as you retire, or at least, take a 25% tax-free lump sum. Research by Standard Life has shown that over 55s who plan on using their tax-free pension cash expect to spend – or have already spent – nearly one-third of their lump sum on average within the first six months of withdrawing it.

However, this could leave you with less to live on and you might face a large tax bill.

A financial planner can discuss your pension options and advise you on how to manage your wealth tax-efficiently. This could allow you to maintain a comfortable income throughout your retirement and enjoy the lifestyle you’ve always dreamed of.

Get in touch

If you’d like support planning a decumulation strategy that will allow you to achieve your goals and enjoy the lifestyle you desire, we can help.

The Aspire Partnership is a family -focused business offering bespoke financial planning in Bristol.

Please get in touch either by email at helpme@aspirellp.co.uk or by calling 0117 9303510.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pension Regulator.